What's the Difference Between Basis and Adjusted Basis?

Your basis in an asset is what you paid for it, and your adjusted basis accounts for changes that have increased or decreased that original cost over time. When you sell an asset, you pay capital gains tax on the difference between your selling price and your adjusted basis — so knowing your adjusted basis is key to calculating how much tax you owe. Improvements to real estate increase your basis, while depreciation deductions taken on a rental property or business asset decrease your basis. For example, if you bought a rental property for $200,000 and claimed $50,000 in depreciation over the years, your adjusted basis would be $150,000 — and when you sell, you'd calculate your gain from that lower number, not the original purchase price. Tracking your basis and all adjustments from the time you acquire an asset until you sell it is important, since records can be hard to reconstruct later.